South Africa’s affluent are struggling to pay off their home and car loans

According to Experian South Africa’s Consumer Default Index (CDI), the rate people defaulted on their loans for the first time decreased in the second quarter of the year.

The CDI is designed to measure the rolling default behaviour of consumers with home loans, vehicle loans, personal loans, credit cards and retail loan accounts.

Although consumer debt remains at R1.9 trillion, the index improved from 4.33 in March to a reading of 4.03 in June 2021, Experian said. The credit specialist said that the improvement could be attributed to the stringent lockdown criteria imposed 12 months prior, resulting in significantly reduced credit extension and thus an expected improvement in the overall CDI performance.

Jaco van Jaarsveldt, chief decision analytics officer at Experian Africa, said: “We have seen new business volumes decrease since the onset of the Covid 19 pandemic, thus reducing the population from which first-time default stems. While we have seen the demand for credit improve to pre-Covid levels over the past 12 months, the supply remains constrained due to the continuous conservative lending criteria imposed by most lenders.”

At 4.03 in 2021 Q2, the year-on-year CDI is tracking lower than the all-time high of 5.68 observed in 2020 Q2, following the initial level 5 lockdown imposed on 27 Mar 2020.

“The CDI improved year-on-year across all products, most predominantly home loans, which improved from 2.90 in 2020 Q2 to 1.83 in 2021 Q2. Home loans account for more than 50% of the composite CDI and as such was the driving force behind the improvement, supported by improvement in all the other banking and retail products,” Van Jaarsveldt said.

Over the past year (2020 Q2 to 2021 Q2), Financial Affluence Segmentation (FAS) groups 1 and 2 have exhibited the least significant improvement (CDI % change).

“Since the onset of Covid, we again see the most affluent consumers benefitting least from the improvement in CDI. There was a noteworthy impact on the Luxury Living group as they are highly exposed to secured credit resulting in a relative CDI improvement of 22%, moving from 3.85 in June 2020 to 2.99 in June 2021,” Van Jaarsveldt said.

“The Aspirational Achievers group, also highly exposed to secured credit, saw a CDI improvement from 4.95 in June 2020 to 3.68 in March 2021, which is also relatively modest, compared to the improvement observed for less affluent FAS Groups.”

Experian noted that the affluent segment boasts an average opening home loan balance over R1.2 million and an average opening vehicle loan balance greater than R450,000 – making them highly exposed to secured credit.

The significant improvement in CDI in 2021 Q2 stems from credit granted, particularly in the retail industry, where many providers opted for more stringent lending criteria along with the impacts of the hard lockdown criteria at the start of the pandemic.

The index looks at six macro Financial Affluence Segmentation (FAS) in analysing its data:

  • Luxury Living (2.5% of credit active population) – Affluent individuals representing the upper crust of South African society with the financial freedom to afford expensive homes and cars;
  • Aspirational Achievers (9.3% of credit active population) – Young and middle-aged professionals with the resources to afford a high level of living while furthering their careers, buying property and establishing families;
  • Stable Spenders (7.2% of credit active population) – Young adults that rely on financial products to assist in making ends meet or to afford specific necessities such as clothing and school fees, or seasonal luxuries;
  • Money Conscious Majority (40.0% of credit active population) – Older citizens that are conscious of where and how they spend their money; often seeking our financial products to cover basic needs or for unforeseen expenses;
  • Laboured Living (24.6% of credit active population) – Financially limited as salaries are below national tax thresholds, they spend their money on basic living necessities such as food and shelter;
  • Yearning Youth (16.4% of credit active population) – Very young citizens new to the workforce; this mix of labourers and possibly working students earn low salaries and are limited to spending on non-essential goods.

Read: South Africa unemployment rate hits new record high

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South Africa’s affluent are struggling to pay off their home and car loans